South Boulder Mines (ASX: STB) has reached a major milestone in the development of its Colluli Potash Project in Eritrea with the signing of a binding term sheet agreement with the Eritrean National Mining Corporation (ENAMCO).
Importantly, the agreement provides significant certainty as to the economic and fiscal basis under which the project can be developed, assisting the company in its ongoing discussions with potential strategic investors.
“The signing of a binding term sheet with ENAMCO is a significant milestone for STB,” South Boulder chief executive officer Paul Donaldson said.
“The agreement establishes clear terms for a partnership with the Eritrean Government through ENAMCO, clearly aligns STB and ENAMCO’s interests in moving project forward with project development and provides certainty which will facilitate interaction with potential financiers and strategic investors.”
Separately, the company has confirmed the Kainite resource at Colluli may be mined and shipped in its own right, which has the potential to improve the financial returns from the project.
Term Sheet
Under the agreement, South Boulder and ENAMCO will incorporate a new Eritrean company, CMSC, that they will each hold a 50% stake in. South Boulder will contribute three members to its board while ENAMCO will have two members.
CMSC will own 100% of the Colluli Potash Project, takeover the Exploration Agreement with Eritrea and assume responsibility for the exploration, development and operation of the project.
It is proposed that project development costs for initial development will be funded 70% by debt sought by CMSC from a third party financier on commercial terms and 30% by equity provided by South Boulder.
To the extent the full 70% of development costs cannot be funded by externally sourced debt, South Boulder will contribute debt to CMSC on arms’ length commercial terms.
It is also entitled to recoup 50% of the equity as a preferential payment from 50% of the project cashflows that would have otherwise been available to all equity holders.
As a result, until such time as the 50% of the equity contributed by STB on behalf of ENAMCO is repaid, STB will be entitled to receive 75% of all free distributable cashflows after debt service obligations.
Pre-production development costs including capital costs, exploration (including past exploration), financing costs/interest, working capital and all other funding required prior to first production
In addition, ENAMCO will provide a stabilisation agreement under which it bears the risk of adverse changes in the Eritrean fiscal regime for 10 years from first production.
Financial Impact
Should CMSC be able to secure the 70% third party debt at an interest rate of LIBOR +5% over a 7 year term, South Boulders IRR for the project will increase to 18.5% from the real, ungeared IRR on a 100% basis of 15.1% that was estimated in its staged development model.
This had examined the potential economics of commencing production from its Sylvinite resource at a rate of 1 million tonnes per annum, and then expanding after 5 years to a production rate of 2 million tonnes per annum by mining and processing the Carnallite resource.
The plan assumes an FOB potash price of US$450 per tonne and excludes the potential to mine and process the Kainite resource, which represents about 60% of the entire Colluli resource
Kainite could potentially be sold as a direct application fertiliser or further processed into conventional potash products as occurs already in nearby markets such as India.
South Boulder is also currently carrying out a study into processing a mixed feed of Kainite, Sylvinite and Carnallite into a single product.
It is also in the process of engaging with processing and product specialists to contribute to scoping studies that will better define this potential and may influence the direction taken in the Definitive Feasibility Study, which started in April 2012.
The Colluli Potash Project hosts a total JORC resource of 1.08 billion tonnes at 17.97% KCl or 11.35% K2O for total contained potash of 194 million tonnes KCl.
Analysis
The binding agreement with ENAMCO provides South Boulder Mines with the certainty required to progress development of the Colluli Potash Project.
It also has the potential to improve the company’s returns from the project, making it more attractive to investors.
South Boulder is trading at 45% cash backing with $16.3 million, or $0.127 per share, in cash as of 31 March 2013. This compares with its market capitalisation of $35.83 million and current share price of $0.28.
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